HNRK Coverage Corner

On September 22, 2022, the Second Circuit issued a decision in Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., Case No. 20-4282, ruling than an insured’s below limits settlement with an excess insurer satisfied the exhaustion requirement of a higher-tier excess policy.

The insured, ASARCO, was a mining, smelting and refining company facing liability in the hundreds of millions for personally injury claims arising from alleged asbestos exposure.  Its insurance program for the relevant period consisted of three excess policies issued by Fireman’s Fund: the first covered $20 million in losses in excess of $30 million for 1982-1983; the second covered $20 million in losses in excess of $30 million for 1983-1984; and the third covered $20 million in losses in excess of $75 million, also for the 1983-1984.  Fireman’s Fund, in turn, obtained reinsurance for $3 million of the third policy from OneBeacon Insurance Company.

Coverage litigation between ASARCO and Fireman’s Fund ensued.  After concluding that its likely exposure under the three policies was $50.3 million, Fireman’s Fund settled with ASARCO for $35 million, $8.5 million of which was allocated to the third policy.  OneBeacon denied the reinsurance claim, arguing that the entire $35 million settlement should have been allocated to the first two policies, and that because the first-layer excess policy for the 1983-1984 policy year was not exhausted by insurance payments up to the policy limit, the third excess policy was not triggered.  The third policy’s Payment of Loss provision stated that the policy “shall apply only after all underlying insurance has been exhausted”, but did not define the term “exhausted”—and in particular, did not specify whether exhaustion could be satisfied by the insured incurring a loss up to the limit of the policy, or instead required full payment by the insurer.

Affirming the district court’s decision in favor of Fireman’s Fund, the Second Circuit ruled that the third excess policy’s exhaustion requirement was ambiguous and could be satisfied by a below-limits settlement, so long as the policyholder’s covered losses exceed the underlying policy’s limit of liability:

The Payment of Loss provision, while providing that Policy 3 “shall apply only after all underlying insurance has been exhausted,” does not define the term “exhausted.”  As the district court concluded, the applicable precedent tells us that this provision standing alone does not unambiguously require actual payment up to the policy limits by the underlying insurers. . . .

Here, because the Payment of Loss provision in Policy 3 does not specify any particular form of exhaustion, a below-limits settlement of the underlying policies is sufficient to exhaust . . . absent unambiguous exhaustion language elsewhere in the policy.

The Court acknowledged that there could be valid reasons to condition excess coverage on actual payment of the underlying policy limit.  Nevertheless, relying on a venerable precedent—Judge Learned Hand’s decision in Zieg v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928)—the Court declined to require such a payment in the absence of express language mandating it.